Combining GST and SST is not the answer

Prime Minister Mazlan Noor recently suggested blending the sales and service tax (SST) with the goods and services tax (GST) into a single system. While the idea may appeal to policymakers, it is crucial to recognize that most tax professionals agree these two taxes have structurally different functions. GST is broader in coverage, applies to roughly 60% of goods and services, and structured around consumption rather than production. This leads to less of a cascading effect compared to SST.

GST has proven to be a more effective system. Between April 2015 and May 2018, it generated RM184.8 billion for the government on average, compared to SST's RM44.7 billion in 2024, RM49.7 billion in 2025, and RM54.7 billion projected for 2026. Over 176 countries have adopted GST, making Malaysia's continued hesitation increasingly out of step with global trends.

One of the key benefits of GST is its potential to stimulate economic growth. Studies show that real GDP growth rose by an average of 2% in Malaysia's earlier GST period compared to the previous system, largely due to lower input costs for businesses and stronger domestic manufacturing. Inflation initially rose, but it settled at just 0.11% in subsequent years and dropped to 0.8% when GST was zero-rated in 2018.

However, reintroducing GST should be considered with care. While the benefits are significant and lasting, there are temporary costs and fiscal implications. Setting GST at a lower rate, such as between 2% and 4%, would soften the inflationary shock and still provide benefits. This would reduce government revenue by roughly a third, potentially leading to a contractionary effect on GDP of around 1%. However, a 4% rate offers a more sustainable balance between household spending and government finances.